Business Cash Advances Vs. Business Loans: Which One is Best for My Business?

What is a Business Cash Advance?

A Business Cash Advance, also known as a Merchant Cash Advance, is a lump sum payment provided from an institution in exchange for a certain percentage of a business’ future debit/credit sales until the debt is paid off. The amount of time a Business Cash Advance takes to pay off depends on the percentage they are taking as well as, of course, the amount of debit/credit sales for the business. Without a fixed term, it can take even years to pay, however, the payments are smaller and sometimes more manageable than large business loan payments. Interest rates can be higher with a Business Cash Advance, and it is usually less regulated due to it not falling under the umbrella of a “loan”.

A Business Loan is the most well known and traditional form of financing for businesses of all sizes. Like any kind of loan, there is usually a lengthy application process with requirements such as a great credit history and long-standing sales. If you have the right collateral, etc., in exchange you receive a smaller interest rate and a fixed term and payment/amortization schedule. A Business Loan is more likely to be with a large financial institution and a default in payments can result in some of your assets being seized to pay the debt.

In order to answer that question and as a business owner, you should take a broad perspective on the position of your business and distinguish the type of financing you require. Here are a few common situations and the options that may be available if your business falls into these similar categories.

Unless you own a corporation or have been in business for years, there’s a good chance that banks will look at your personal credit history when deciding to provide you a loan. If your credit rating is dismal or you don’t have a strong history, chances are that this will reflect on their decision or on the interest rate they offer you. In these situations, it may be best to apply for a Business Cash Advance instead or when your attempts for a business loan have been exhaustive.
2. My business has a great credit history and I prefer the predictability of my accounts payable.

For many businesses, they prefer going the traditional route of applying for a loan through a reputable bank. These loans are predictable in that the payments are the same each month and there’s a set expiration in which they know the loan will be paid off. In this situation, a business can better budget their expenses for the month as they don’t need to guess how many sales they could have and how much of their debt they will have to pay. If you have great credit and prefer these options, a business loan may be a more pliable option.

3. I need capital now and can’t wait for the bank to approve a loan or set restrictions on how I can use it.

The amount of time it takes to go through the application process for a Business Loan can be frustrating, especially if you require the funds now to keep your business afloat. Oftentimes as well, big banks will set limitations on how their loans can be used, such as a restriction on paying off other loans, etc. If your business has accumulated debt and you require more capital to consolidate and fund more marketing efforts, your best bet may be to apply for a Business Cash Advance, which is more flexible to your requirements.

Interested in learning more about which option, a Business Cash Advance or a Business Loan, is best for your business? Do your research and reach out to a member of our team for more information. You can also read our other blog posts here to help you in your search for capital.